DBS Group Research analyst Lim Rui Wen has maintained her “buy” calls on UOB and Oversea-Chinese Banking Corporation (OCBC) with higher target prices of $27.60 and $12.50 respectively.
Lim says the higher target prices represent higher 1.04 times FY2022 price-to-book value (P/BV) as she rolls over to higher return on equity (ROE) assumptions in FY2022.
“We believe the improved business momentum in January observed across all Singapore banks is likely to be sustained, amidst the more optimistic economic environment and improved sentiment,” she says.
“Current valuations are still undemanding as we look towards earnings recovery led by more stabilised net interest margin (NIM), higher loan growth, and lower credit costs alongside a gradual uptick in long-end yields,” she adds.
Lim is also positive that higher dividends are on the horizon as the banks’ management have expressed willingness to commit to higher dividends compared to FY2020.
On the sector, Lim sees the possibility of improved net interest income (NII) for all three banks to improve in FY2021 as all three banks are targeting loan growth, and that credit demand is expected to pick up sequentially.
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During the 4QFY2020, all three banks – except DBS – saw q-o-q improvements in NIMs.
“These mark OCBC/UOB’s first and second quarter of NIM improvement, led by lower cost of funds. The worst NIM declines are largely over, with DBS/OCBC/UOB guiding for FY2021 NIM to largely stabilise at 1.45-1.50/1.50-1.55/ around 1.57%,” notes Lim.
The way Lim sees it, the asset quality environment has since stabilised from its lowest levels, and that the banks’ proactive provisioning in FY2020 has paved the way for ROE recovery.
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“DBS/OCBC/UOB has booked $3.1/$2.0/$1.6 billion of provisions in FY2020, representing 70/67/57bps credit costs, compared to guidance of 80-130bps (FY2020-2021), 100-130bps (FY2020-2021), 60bps (FY2020) and 30-40bps (FY2021) respectively,” she says.
“Accordingly, as we expect non-performing loans (NPLs) to gradually pick up through FY2021 as moratorium and relief extensions end, we believe strong non-performing assets (NPA) coverage of 110/115/107% and ample general provisions and management overlay cushion paves the way for ROE recovery as special provisions start to pick up.”
“The exit of loans under government moratoriums has been largely organised, transitioning into an extended phase. Credit costs may surprise on the upside should the economic environment continue to improve,” she adds.
Shares in DBS, UOB and OCBC closed at $27.10, $25.16 and $11.09 on March 1.
